Harnessing the Winds of Change?

In the aftermath of the financial crisis of 2008, as fossil fuel costs fell and “green energy” stocks struggled to gain traction, the solar, wind, tidal flow and electric vehicle industries were heavily shorted by the buy side. Since then however, slowly but surely, the environmental segment has gained momentum as a result of economies of scale and governmental subsidies. This trend has accelerated in the last few months with the predicted changes in the US political regime and the ongoing push toward sustainability from the corporate and consumer sectors. However, do hedge funds share this sentiment or is there a sustained contrarian stance?

The difficulty with analyzing the more established forms of “green energy” is that many of the major suppliers of wind turbines and solar energy, for example, are part of huge entities (GE, Siemens, etc.) which masks the impact of changes in market sentiment. Consequently, it is probably best to focus on selected standalone entities to see if there are any meaningful trends.

Let’s look first of all at First Solar (FSLR). The recent history since July implies that the time of solar energy may be dawning. According to FIS Astec Analytics, the institutional volume of securities being lent to support short positions decreased from about 12.5 million shares in July to about 2 million at the end of October. There has been a slight increase seen in November though perhaps taking account of the concerns around the US election results. The market price of FSLR continues its upward trend and while some of this could be attributed to a general increase in market confidence since the beginning of November, perhaps the concomitant increase in shares borrowed indicates some perception of over-valuation…..but this is not definitive by itself.

The chart below is constructed from Hazeltree’s unique access to both long and short holders in the asset management space and shows a decreasing number of long holders in First Solar, which might be an early indicator of the uncertainty of future demand. However, it could also reflect a typical transient trend in a now more mature industry….only continued monitoring will tell.

(Note: For each direction of ‘scores’ the values are ‘binned’ into integers between 0 and 99. A 0 would indicate that a security position is sparsely held, while a 99 would indicate the security position is widely held.)

In order to confirm whether these trends are unique to First Solar, we can analyze another solar power related company Sunrun Inc (RUN). It can be seen that the borrowed volume of securities has a remarkably similar shape including the slight increase in recent days…potentially on the back of some fire risk batteries issue. The share price has also slipped a little in the last month but it still remains more than 4 times what it was in April.

On the back of the huge increase in share price to its height in October of over $80 per share, the short side of the industry moved as one to increase their short positions whereas since then trends have been less clear with equal bets by both the long and short sides as shown by the ‘scores’ shown below.

Vestas, the Danish wind-turbine manufacturer, has been a prominent company in this space for many years. It appears that, despite some of the negative press around the killing of birds, concerns around disruption to the landscape and the noise from turbines, the anticipated upward trend toward harnessing wind power remains strong. The shares borrowed to cover short positions has declined, particularly in recent months and, unlike First Solar, that trend has not reversed in the last couple of weeks.

This positive trend has carried over to the buyside, as shown below, with not just a decreasing number of short position holders but with an increasing number of long position holders. The prevailing view amongst hedge fund participants therefore appears to be in-line with the general broader market perception.

No analysis would be complete without some attention to ‘causes celebres’ in the form of Tesla and Nikola.

Tesla, probably one of the biggest ‘shorts’ of the decade from the buyside’s perspective over the last 5 years, has seen a meteoric rise in share price as consumer acceptance, production acceleration and global governmental mandates have combined to create a ‘perfect storm’ of upside potential. However, the short holders in Tesla remain committed which might reflect the potential impact of competition from the traditional global manufacturers, not to mention the controversial elements of management. It is also very difficult to judge the impact of SolarCity that is included in the Tesla organization and whether it is seen as a supportive part of the enterprise or a drag on expenses. Given the trend of the last few months exhibited towards First Solar (albeit with a slight reversal in the last couple of weeks), it would appear the former is the case.

Nikola, no stranger to controversy, has been facing its own non-green woes as reflected by share price and a roller coaster ride of short and long holders.

Environmentally sound methods of power generation appear, in the main, to be coming of age and have been given new impetus by the impending change of regime in the USA. However, there does seem to be some pull-back on solar power which can be monitored to understand whether this is an enduring trend. Electric vehicles are also gaining acceptance, especially with the introduction of SUVs and Trucks powered by batteries. The early doubts of the 2008-2013 era seem to be dissipating, although the impact of non-energy related issues on fledgling, potentially significant players, is still creating opportunities for the buy-side.